UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2000 ------------------ OR [ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File Number: 0-16181 ------- ABC BANCORP - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) GEORGIA 58-1456434 ------------------------ --------------------- (State of incorporation) (IRS Employer ID No.) 24 SECOND AVE, SE MOULTRIE, GA 31768 ---------------------------------------- (Address of principal executive offices) (912) 890-1111 ------------------------------- (Registrant's telephone number) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No_____ - There were 8,347,008 shares of Common Stock outstanding as of September 30, 2000. 1
ABC BANCORP QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 2000 TABLE OF CONTENTS PART I - FINANCIAL INFORMATION Item Page - ----- ---- 1. Financial Statements Consolidated Balance Sheets 3 Consolidated Statements of Income & Comprehensive Income 4 Consolidated Statements of Cash Flows 6 Notes to Consolidated Financial Statements 7 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 8 3. Quantitative and Qualitative Disclosures about Market Risk 14 PART II - OTHER INFORMATION 4. Submission of Matters to a Vote of Securities Holders 15 6. Exhibits and Reports on Form 8-K 15 Signature 16 2
ABC BANCORP AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Dollars in Thousands) (Unaudited) <TABLE> <CAPTION> =================================================================================================================== Sept 30 Dec 31 2000 1999 -------- ------- <S> <C> <C> Assets - ------ Cash and due from banks $ 28,823 $ 80,130 Securities available for sale, at fair value 161,124 143,538 Loans 588,335 530,225 Less allowance for loan losses 10,231 9,895 -------- -------- Loans, net 578,104 520,330 -------- -------- Premises and equipment, net 20,060 19,540 Other assets 24,605 25,922 -------- -------- $812,716 $789,460 ======== ======== Liabilities and Stockholders' Equity - ------------------------------------ Deposits Noninterest-bearing demand $ 85,427 $103,279 Interest-bearing demand 143,089 147,561 Savings 46,833 52,659 Time, $100,000 and over 112,954 95,282 Other time 262,571 241,877 -------- -------- Total deposits 650,874 640,658 Federal funds purchased & securities sold under repurchase agreements 14,084 397 Other borrowings 66,466 66,150 Other liabilities 3,973 6,239 -------- -------- Total liabilities 735,397 713,444 -------- -------- Stockholders' equity - -------------------- Common stock, par value $1; 15,000,000 shares authorized 9,137,990 and 9,098,690 shares issued 9,138 9,099 Surplus 29,237 28,854 Retained earnings 46,496 42,188 Accumulated other comprehensive income (638) (1,507) Unearned Comp-Grants (694) (560) -------- -------- 83,539 78,074 Less cost of shares acquired for the treasury, 790,982 and 374,823 shares (6,220) (2,058) -------- -------- Total stockholders' equity 77,319 76,016 -------- -------- $812,716 $789,460 ======== ======== </TABLE> See Notes to Consolidated Financial Statements. 3
ABC BANCORP AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME THREE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999 (Dollars in Thousands) (Unaudited) <TABLE> <CAPTION> =================================================================================================================== 2000 1999 ---------- ---------- <S> <C> <C> Interest income Interest and fees on loans $ 15,038 $ 12,877 Interest on taxable securities 1,807 1,853 Interest on nontaxable securities 779 272 Interest on deposits in other banks 445 155 ---------- ---------- 18,069 15,157 ---------- ---------- Interest expense Interest on deposits 7,247 5,519 Interest on fed funds purchased and securities sold under agreements to repurchase 146 145 Interest on other borrowings 1,185 486 ---------- ---------- 8,578 6,150 ---------- ---------- Net interest income 9,491 9,007 Provision for loan losses 303 554 ---------- ---------- Net interest income after provision for loan losses 9,188 8,453 ---------- ---------- Other income Service charges on deposit accounts 1,564 1,405 Other service charges, commissions and fees 488 440 Other (57) (25) Loss on sale of securities - (44) ---------- ---------- 1,995 1,776 ---------- ---------- Other expense Salaries and employee benefits 4,211 3,942 Equipment and occupancy expense 1,185 1,014 Other operating expenses 2,331 2,066 ---------- ---------- 7,727 7,022 ---------- ---------- Income before income taxes 3,456 3,207 Applicable income taxes 1,118 1,065 Net income $ 2,338 $ 2,142 ---------- ---------- Other comprehensive income, net of tax: Unrealized holding gains (losses) arising during period, net of tax $ 1,197 $ (280) Reclassification adjustment for losses included in net income, net of tax $ - $ 29 ---------- ---------- Comprehensive income $ 3,535 $ 1,891 ========== ========== Income per common share-Basic $ 0.28 $ 0.25 ========== ========== Income per common share-Diluted $ 0.28 $ 0.24 ========== ========== Average shares outstanding 8,364,468 8,697,845 ========== ========== </TABLE> See Notes to Consolidated Financial Statements. 4
ABC BANCORP AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999 (Dollars in Thousands) (Unaudited) <TABLE> <CAPTION> =================================================================================================================== 2000 1999 ---------- ---------- <S> <C> <C> Interest income Interest and fees on loans $ 42,937 $ 37,406 Interest on taxable securities 5,954 5,593 Interest on nontaxable securities 1,260 815 Interest on deposits in other banks 837 468 ---------- ---------- 50,988 44,282 ---------- ---------- Interest expense Interest on deposits 19,555 16,726 Interest on fed funds purchased and securities sold under agreements to repurchase 208 383 Interest on other borrowings 2,691 740 ---------- ---------- 22,454 17,849 ---------- ---------- Net interest income 28,534 26,433 Provision for loan losses 952 1,563 ---------- ---------- Net interest income after provision for loan losses 27,582 24,870 ---------- ---------- Other income Service charges on deposit accounts 4,546 4,049 Other service charges, commissions and fees 1,503 1,683 Other 63 183 Loss on sale of securities - (81) ---------- ---------- 6,112 5,834 ---------- ---------- Other expense Salaries and employee benefits 12,659 11,625 Equipment and occupancy expense 3,268 3,148 Other operating expenses 7,146 6,251 ---------- ---------- 23,073 21,024 ---------- ---------- Income before income taxes 10,621 9,680 Applicable income taxes 3,440 3,285 ---------- ---------- Net income $ 7,181 $ 6,395 ---------- ---------- Other comprehensive income, net of tax: Unrealized holding gains (losses) arising during period, net of tax $ 869 $ (1,338) Reclassification adjustment for losses included in net income, net of tax $ - $ 53 ---------- ---------- Comprehensive income $ 8,050 $ 5,110 ========== ========== Income per common share-Basic $ 0.85 $ 0.73 ========== ========== Income per common share-Diluted $ 0.84 $ 0.73 ========== ========== Average shares outstanding 8,498,246 8,694,098 ========== ========== </TABLE> See Notes to Consolidated Financial Statements. 5
ABC BANCORP AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999 (Dollars in Thousands) (Unaudited) <TABLE> <CAPTION> =================================================================================================================== 2000 1999 ---------- ---------- <S> <C> <C> OPERATING ACTIVITIES Net Income $ 7,181 $ 6,395 -------- -------- Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 1,575 1,460 Provision for loan losses 952 1,563 Amortization of intangible assets 244 603 Net loss on securities available for sale (81) Other prepaids, deferrals and accruals, net (1,353) 4,101 -------- -------- Total adjustments 1,418 7,646 -------- -------- Net cash provided by operating activities 8,599 14,041 -------- -------- INVESTING ACTIVITIES Proceeds from maturities of investment securities 10,922 51,564 Purchase of investment securities (27,191) (67,560) Proceeds from sales of securities available for sale - 20,240 Increase in loans (58,726) (48,892) Purchase of premises and equipment (2,095) (1,712) -------- -------- Net cash used in investing activities (77,090) (46,360) -------- -------- FINANCING ACTIVITIES Net increase (decrease) in deposits 10,216 (25,132) Net increase in repurchase agreements 13,687 10,880 Increase (decrease) in long-term borrowings 11,950 (2,053) Increase (decrease) in other borrowings (11,634) 40,571 Dividends paid (2,873) (2,174) Purchase treasury stock (4,162) (88) -------- -------- Net cash provided by (used in) financing activities 17,184 22,004 -------- -------- Net decrease in cash and due from banks $(51,307) $(10,315) Cash and due from banks at beginning of period 80,130 56,475 -------- -------- Cash and due from banks at end of period $ 28,823 $ 46,160 ======== ======== </TABLE> See Notes to Consolidated Financial Statements. 6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) - -------------------------------------------------------------------------------- NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The accounting and reporting policies of ABC Bancorp and subsidiaries ("the Company") conform to generally accepted accounting principles and to general practices within the banking industry. The interim consolidated financial statements included herein are unaudited, but reflect all adjustments which, in the opinion of management, are necessary for a fair presentation of the consolidated financial position and results of operations for the interim periods presented. All adjustments reflected in the interim financial statements are of a normal, recurring nature. Such financial statements should be read in conjunction with the financial statements and notes thereto and the report of independent auditors included in the Company's Form 10-K Annual Report for the year ended December 31, 1999. The results of operations for the nine months ended September 30, 2000 are not necessarily indicative of the results to be expected for the full year. 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Liquidity and Capital Resources Liquidity management involves the matching of the cash flow requirements of customers, who may be either depositors desiring to withdraw funds or borrowers needing assurance that sufficient funds will be available to meet their credit needs, and the ability of ABC Bancorp and its subsidiaries (the "Company") to meet those needs. The Company strives to maintain an adequate liquidity position by managing the balances and maturities of interest-earning assets and interest-bearing liabilities so that the balance it has in short-term investments at any given time will adequately cover any reasonably anticipated immediate need for funds. Additionally, the subsidiary banks (the "Banks") maintain relationships with correspondent banks which could provide funds to them on short notice, if needed. The liquidity and capital resources of the Company is monitored on a periodic basis by state and Federal regulatory authorities. As determined under guidelines established by these regulatory authorities, the Company's and the Banks' liquidity ratios at September 30, 2000 were considered satisfactory. At that date, the Banks' short term investments were adequate to cover any reasonably anticipated immediate need for funds. The Company is aware of no events or trends likely to result in a material change in liquidity. During the nine months ended September 30, 2000, total capital increased $1,303,000 to $77,319,000. This increase in capital resulted from the retention of net earnings of $4,308,000 (after deducting dividends to shareholders of $2,873,000), less $4,162,000 for the purchase of 416,159 shares acquired for the treasury, plus $288,000 accrual for award grants, and an increase of approximately $869,000 in unrealized gains on securities available for sale, net of taxes. At September 30, 2000, ABC had no binding commitments for capital expenditures. The Company anticipates that approximately $210,000 will be required for capital expenditures during the remainder of 2000. Additional expenditures may be required for other mergers and acquisitions. At present, ABC has not signed a letter of intent, nor has it entered into a definitive agreement to merge into or acquire another bank or company. 8
Results of Operations The Company's results of operations are determined by its ability to effectively manage interest income and expense, to minimize loan and investment losses, to generate noninterest income and to control noninterest expense. Since interest rates are determined by market forces and economic conditions beyond the control of the Company, the ability to generate net interest income is dependent upon the Banks' ability to obtain an adequate spread between the rate earned on interest-earning assets and the rate paid on interest-bearing liabilities. Thus, the key performance measure for net interest income is the interest margin or net yield, which is taxable-equivalent net interest income divided by average earning assets. The primary component of consolidated earnings is net interest income, or the difference between interest income on interest-earning assets and interest paid on interest-bearing liabilities. The net interest margin is net interest income expressed as a percentage of average interest-earning assets. Interest- earning assets consist of loans, investment securities and Federal funds sold. Interest-bearing liabilities consist of deposits and borrowings such as Federal funds purchased, securities sold under repurchase agreements and Federal Home Loan Bank advances. A portion of interest income is earned on tax-exempt investments, such as state and municipal bonds. In an effort to state this tax- exempt income and its resultant yields on a basis comparable to all other taxable investments, an adjustment is made to analyze this income on a taxable- equivalent basis. 9
Comparison of Statements of Income The net interest margin on a taxable-equivalent basis was 5.40% and 5.44% during the nine months ended September 30, 2000 and 1999, respectively, a decrease of 4 basis points. These variances are primarily attributable to fluctuations in the average rates charged and fees earned on loans. Net interest income on a taxable-equivalent basis was $29.2 million as compared to $26.9 million during the nine months ended September 30, 2000 and 1999, respectively, representing an increase of 8.55%. The provision for loan losses is a charge to earnings in the current period to replenish the allowance for loan losses and maintain it at the level management determines is adequate. The provision for loan losses charged to earnings amounted to $952,000 and $1,563,000 during the nine months ended September 30, 2000 and 1999, respectively, a decrease of $611,000, or 39.1%. The allowance for loan losses represents a reserve for potential losses in the loan portfolio. The adequacy of the allowance for loan losses is evaluated quarterly based on a review of all significant loans, with a particular emphasis on non-accruing, past due and other loans that management believes require attention. Another factor used in determining the adequacy of the reserve is management's judgment about factors affecting loan quality and assumptions about the local and national economy. The allowance for loan losses was 1.74% and 1.87% of total loans outstanding at September 30, 2000 and December 31, 1999. As of September 30, 2000, nonperforming assets were $5,871,000 compared to $6,086,000 in nonperforming assets as of December 31, 1999. Management considers the allowance for loan losses as of September 30, 2000 adequate to cover potential losses in the loan portfolio. 10
Following is a comparison of noninterest income for the nine months ended September 30, 2000 and 1999 (dollars in thousands). Nine Months Ended ----------------- September 30, 2000 September 30, 1999 ------------------ ------------------ Service charges on deposits $4,546 $4,049 Other service charges, commissions & fees 1,503 1,683 Other income 63 102 ------ ------ Total noninterest income $6,112 $5,834 ====== ====== Total noninterest income for the nine months ended September 30, 2000 was $278,000 higher than during the same period in 1999. Following is an analysis of noninterest expense for the nine months ended September 30, 2000 and 1999 (dollars in thousands). Nine Months Ended ----------------- September 30, 2000 September 30, 1999 ------------------ ------------------ Salaries and employee benefits $12,659 $11,625 Occupancy and equipment expense 3,268 3,148 Other expense 7,146 6,251 ------- ------- Total noninterest expense $23,073 $21,024 ======= ======= Total noninterest expense for the nine months ended September 30, 2000 was $2,049,000 higher than during the same period in 1999. Salaries and employee benefits for the nine months ended September 30, 2000 were $1,034,000 or 8.9% higher than during the same period in 1999. Approximately $107,000 or 10.3% this increase was the result of incentive compensation to employees under the ABC Bancorp 2000 Officer/Director Stock Bonus Plan. The Company does not anticipate that this cost will be repeated in the foreseeable future. The balance of the increase is due to additional bonus accruals under the Company's incentive compensation plan due to improved performance of the Company and normal increases in salaries and benefits. 11
Other expense for the nine months ended September 30, 2000 increased $895,000 or 14.3% as compared to the same period in 1999. Approximately $107,000 or 12% of this increase was the result of incentive compensation to directors of the Company and its subsidiaries under the ABC Bancorp 2000 Officer/Director Stock Bonus Plan. The Company does not anticipate that this cost will be repeated in the foreseeable future. Data processing costs were approximately $115,000 higher during the first quarter due to the implementation of several projects. The balance of the increase is due to normal increases in costs between periods. Following is a condensed summary of net income during the nine months ended September 30, 2000 and 1999 (dollars in thousands). Nine Months Ended ----------------- September 30, 2000 September 30, 1999 ------------------ ------------------ Net interest income $28,534 $26,433 Provision for loan losses 952 1,563 Other income 6,112 5,834 Other expense 23,073 21,024 Income before income taxes 10,621 9,680 Applicable income taxes 3,440 3,285 ------- ------- Net income $ 7,181 $ 6,395 ======= ======= Net income increased $786,000 or 12.3% to $7,181,000 for the nine months ended September 30, 2000 as compared to $6,395,000 for the nine months ended September 30, 1999. Net interest income of ABC and its subsidiaries increased $2,101,000, the provision for loan losses decreased by $611,000 and all other noninterest expense increased by $2,049,000. 12
Comparison of Balance Sheets Total assets increased by $23.2 million, or 2.94% to $812.7 million at September 30, 2000 from $789.5 million at December 31, 1999. Total earning assets increased by $41.0 million, or 5.79%, to $749.5 million at September 30, 2000 from $708.5 million at December 31, 1999. Total loans, net of the allowance for loan losses, increased by $58 million, or 11.2% to $578 million at September 30, 2000 from $520 million at December 31, 1999. Total deposits increased by $10 million, or 1.56%, to $651 million at September 30, 2000 from $641 million at December 31, 1999. Approximately 13.12% and 16.12% of deposits were noninterest-bearing as of September 30, 2000 and December 31, 1999, respectively. 13
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The company is exposed only to U. S. Dollar interest rate changes and, accordingly, the Company manages exposure by considering the possible changes in the net interest margin. The Company does not have any trading instruments nor does it classify any portion of the investment portfolio as held for trading. The Company does not engage in any hedging activities or enter into any derivative instruments with a higher degree of risk than mortgage backed securities which are commonly pass through securities. Finally, the Company has no exposure to foreign currency exchange rate risk, commodity price risk, and other market risks. Interest rates play a major part in the net interest income of a financial institution. The sensitivity to rate changes is known as "interest rate risk." The repricing of interest earning assets and interest-bearing liabilities can influence the changes in net interest income. As part of the Company's asset/liability management program, the timing of repriced assets and liabilities is referred to as Gap management. It is the policy of the Company to maintain a Gap ratio in the one-year time horizon of .80 to 1.20. The Company uses simulation analysis to monitor changes in net interest income due to changes in market interest rates. The simulation of rising, declining and flat interest rate scenarios allows management to monitor and adjust interest rate sensitivity to minimize the impact of market interest rate swings. The analysis of the impact on net interest income over a twelve month period is subjected to a gradual 200 basis point increase or decrease in market rates on net interest income and is monitored on a quarterly basis. The most recent simulation model projects net interest income would decrease 1.17% if rates rise gradually over the next year. On the other hand, the model projects net interest income to increase .47% if rates decline over the next year. 14
Part II. Other Information Item 4. Submission of Matters to a Vote of Securities Holders There were no matters submitted to a vote of securities holders during the quarter ended September 30, 2000. Item 6. Exhibits and Reports on Form 8-K There were no exhibits and reports filed on Form 8-K during the quarter ended September 30, 2000. 15
SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the Undersigned thereunto duly authorized: ABC BANCORP 11/8/00 /s/ W. EDWIN LANE, JR. - ------------------- -------------------------------------- DATE W. EDWIN LANE, JR. EXECUTIVE VICE PRESIDENT & CHIEF FINANCIAL OFFICER (Duly authorized officer and principal financial/accounting officer) 16